SOX socking it to business

Today’s column suggests that you think that the impact of SOX has been positive. (Click here to see column.)

If so, I’d like to see someone point to one iota of evidence that SOX mitigated the first post-SOX meltdown, the subprime mortgage debacle. I can find no positive contribution from SOX.

Wall Street sold subprime mortgage securities with looser than historical underwriting standards because “the could.” They sold CDOs to Europeans and Chinese that were inadequately stress tested and under-secured because “they could.” I’ll grant that the management at New Century may have been ignorant and just played along, but I’m certain that the brains at GMAC (Ditech, RFC, etc.) knew what was going on. I would be surprised if GMAC’s credit risk analysts didn’t start a private pool in 2004, predicting the GMAC’s losses in 2006/2007 related to newly loosened underwriting standards.

Some of us declined invitations to form CDO deals, not because of SOX but because we understood the flaws in the models used by the issuers. Having worked with large issuers, I’m certain that others at most of the large, public mortgage issuers saw the same things, but went forward with the deals. Wall Street set the “standards” and everyone else just merrily went along, even if the standards were known to be unrealistic.

If SOX had any value, I think we’d see it mitigating losses in the subprime and CDO arenas, but nothing seems to be happening.

By the way, SOX didn’t make fraud illegal. Fraud has always been illegal. SOX merely made the CEO and CFO criminally responsible for the actions of others. Hence, lots of good people now avoid those roles and refuse to serve on public boards. That’s not a positive. Also, SOX has raised the cost of being “public” in the US by around $1 million annually (based on anecdotal evidence), driving many IPOs to foreign exchanges. That’s not positive.

I’m sorry to say that I can’t point you to an academic or think tank studying my claims. Maybe you have a source that’s seriously studying this.

I don’t think you are talking to the right people when you allude that SOX doesn’t hurt American business. You must be talking to the attorneys, accountants, insurance brokers, and executives that are passing the liability down to the workers, contractor companies, and ultimately, the stockholder. These groups are making a killing on avoiding liability while the actual people who have to do the work are being more and more restricted by SOX. Furthermore, people who supported these companies are being required to absorb more and more liability previously absorbed by the company. It may take more time than has played out, but you’ll see the effects of the additional burden being put on all corporations. The good contractors and employees will depart because the companies will become machines of SOX compliance. The companies will just not be as nimble as before. In this case a pound of prevention is not better than an ounce of cure required to prosecute fraud.

You also failed to mention that many IPO’s are now being introduced on the London Stock Exchange to avoid the SOX burden.

The reason you don’t hear any CEOs complaining is that no one will tell you that their company is worth less because of something they are doing internally. It just “has” be better because the attorneys say it is.

Al, I suggest you go and talk to some of the people (not SOX workers or investor relations) that must deal with the effects of SOX to get a feel for what is really going on. Don’t just talk to this new class of SOX workers (both internal and external) that say “They’ll see it when they believe it”. These folks are just making too much money to be objective while helping the companies supposedly become “SOX compliant”.